UK Tax System - Essay Example

UK Tax System Yvonne L. Academia Research This paper examines the selected elements of British tax policy that discusses the current alternative tax bases that relies on the fundamental aspect on income, expense and wealth. The paper also discusses its benefits and its disadvantages of the current tax system that studies its implication for future tax reforms. British Tax System In the desire to keep in constant allegiance to the demands of modern technology and public service, the government has claimed that taxes as the primary source of revenue would surely create an appropriate solution on the national budget crisis scenario. With the government's source taken from the public taxation always greater than the amount that is intended for use by the government, taxes are levied to fund several programs. Other governmental policies are also geared towards the redistribution of wealth from the rich and poor respectively in relief operations, public education, social security benefits and reparations. However, fundamental methods of collection are not foolproof and possibilities for inefficiencies are always prevalent. Tax policies being a highly political and controversial issue do require extensive analysis and determination on its viability to gain the paying sector's acceptance and economic performance. The neo-classical economic theories whose studies believe that taxation brings about economic inefficiencies have suggested changes in the tax systems that would work to minimise the distortion. Tax remittances of the ordinary working sector accommodating deficiencies brought about by certain deficits were seen as the basis for the recognition of its disadvantages. However the complexities of the British Tax system have served to greatly increase the stress and expense to millions of taxpayers as tax season approaches in Kay(1990)1. Simplification of the British tax system has allowed the common platforms of many political parties in grandstanding tax rules and exemptions. Disadvantages in the assessment, calculation and collection of taxes are often criticized as ineffective and administratively expensive according to Emes and Clemens (2001)2. Determined to maintain absolute performance of the economy, changes were aimed at creating several programs that redistribute wealth and prosperity to all. Tax cuts became a scene in fiscal reforms that has announced reductions in income taxes and simplification of the system which focused on the tax laws themselves without upsetting the current balance of tax burdens or taxes paid by the individual. Alternative tax base system was introduced that basically focused on income, expense and wealth. Income derivatives in the corporate ladder include Value added tax (VAT) and excise taxes while individual income tax has pre-existed along with social insurance continuity. On investment and entrepreneurship, under expenditures or consumption taxes, capital gains and sales taxation is considered tentative in nature. Property tax summarized under wealth taxation has gained support claiming that anti-wealth tax is funded by a coterie of wealthy taxpayers whose instinctive rejection of the system comes from the broad aspiration to become wealthier and amass more fortune by any means. Income derived from gainful employment; pensions; shares and dividends; interest on savings and trust and rentals is deemed taxable at a certain level. Forming the bulk of revenues for the British government, each earning person below the age of 65 is afforded an income tax allowance or a tax-free allowance each year of 5,035Gbp. For earning persons of over 65 but below 74, any income above 7,280Gbp is taxable while elderly individuals whose income is below 7,420 are exempted from paying taxes. But where income is in excess of one's tax-free allowance, taxation is based on the age-related allowance. Earners, whose income is 1 to 2,150 above their mandated tax allowance, shall enjoy a flat 10% tax rate. Those whose accumulated gross annual earning excess is over 2,150Gbp are then required to pay higher tax percentage rates. Yet the government has still provided other reliefs and allowances that can reduce the Income Tax bill - and in some cases means one may have no tax to pay. With taxable income paid by residents and non-residents, those working in British soil are limited to any tax deducted at source from a trade or profession carried on in the British establishment. Residents outside Britain with foreign income are taxed on a remittance basis. Companies whose terms of incorporation, ownership, control and management are under the British soil are also hereby considered on "resident" status and highly liable to pay their corporate income dues. Naturally, those in the upper echelons who are receiving/earning an above average income are expected to pay higher tax rates. Insurance tax rates being the second largest source of government revenues helps build up entitlements to social security benefits including state pensions. This is adjustable according to the employment status, whether employed or self-employed and stops when an individual reaches a certain pension age. Summarily, ones NIC contributions are beneficial for state pensions and incapacity benefits. Widowed parents are also allowed bereavement payments and allowances that form part and parcel of this program. Provided that one's earnings have reached more than a certain level, the Insurance tax is levied currently for men under 65 and women under 60. For self-employed individuals earning above 97 - 645 per week, 11 per cent of this amount is payable to the government. For self-employed persons, a flat rate of 2.10 is required and eight percent of the taxable profits annual profits between 5,035 and 33,540 and one per cent on any taxable profit over that amount if your earnings in the 2006-2007 tax years are expected to be less than 4,465. Under the Small Earnings Exception (SEE) one may be exempted from payments for the 2006-2007 tax years. In order to make a single market effective, the European Union including the United Kingdom has imposed on VAT as a tax paid normally for the price of goods and services bought. Corporate Tax, being the fourth largest source of revenue compensates intrinsically for the lowered and standard rates implanted on personal income taxes to harmonize and keep up with the country's budgetary targets. With tax debates confined to VAT and company profits Vat rate has rose to twenty-two percent in the UK while other domestic services and protective supplies charge a reduced rate of five per cent lower. Other items like food, print materials, children's clothing and equipments for disabled individuals are vat-exempt. Forming part of an expense tax, capital gains tax is currently subjected to a marginal rate and slightly different for individuals and corporations for immovable properties. Companies' chargeable gain is calculated on proceeds less its cost but is entitled to an indexation allowance with reference to movements based on the retail price index. Other duties would include excise tax chargeable on most things including fuel, alcohol, tobacco, betting and vehicles. Stamp duties commonly utilized on transfer of shares and certain securities at a rate of 0.5%. Preferring to cash in on the riches and work for its redistribution, inheritance tax or popularly termed a the "wealth tax" is levied on transfer of valuable items like ownership on lands thru estates inherited from deceased persons; gifts within the seven year period after death; lifetime chargeable transfers like trust funds which is set at 285,000 Gbp and requires 40% upon the death of the grantor. This type of tax is paid by the executors of the deed or administrators of the estate before any probate are granted. Further, gifts made seven years prior to death are not taxed; but a tapered inheritance tax rate is made between three and seven years before. There are some important exceptions to this treatment which is interpreted as the "reservation of benefit rule", which says that a gift is ineffective for inheritance tax purpose if the giver benefits from the asset in any way like living in a gifted house. A simpler tax system was seen to alleviate the high cost of compliance brought about by slow collections and tough filing systems that takes up time and effort on the taxpayers. This would mean having to spend less time and money on the preparation of individuals and businesses tax returns. Simplification necessarily is always on the top of the list where taxpayers are often heard complaining on the hardship encountered that has estimated several hours spent on assessment systems on an individual's burden in Sanford (1990)3. Simpler taxes serve to also make the overall level of tax burdens more apparent and reduce complexities in millions of people paying incorrect amount for revenue. It is an individual's advantage to know by heart the guidelines for exemptions in order to save oneself from the hassle of reclaiming tax at the end of the year. With the flat tax rate percentage imposed across on earners whose income is below the 7,280Gbp band, this uniformity presumably leaves a minimal margin of error. Additionally, part-time workers and students in particular working during breaks and holidays can benefit income tax exemption if they follow a simple procedure as advised by PwC by completing exemption form P38(S) and apply for an income tax relief. This is a worthwhile advantage for all young people and students who desire to remain students within the tax year and do not have a total income from all sources - apart from student loans, scholarships and educational grants - of more than 5,085 in the tax year 2006-07 according to Kerswill4. Sutherland5 has also cited that in cases where basic income is concerned, the scale of losses is smaller where basic income is retained. Marginal rate of alternative forms are seen higher is the base is narrow than the income tax and lower if the base is also widened. In general, the neutral package involving tax cuts serves to reduce the number of losers from the benefit cuts alone. Alternative financial adjustments would reflect that the number of family units losing income tax cut remains the same as when there is none. Most striking, there is no redistribution of income on an annual basis due in part to the presence of taxes that appear to be regressive with respect to income and expenditure. The reduction of income taxes and raise in consumption taxes particularly for large corporations has however seen a dramatic support where the extent of integration in individual and corporate income has been reduced as well. Estate tax and or wealth taxation according to Frank is an abundance of items of economic value or the possession of such items. This act of wealth taxation and re-distribution itself has not achieved 100% efficiency due to the maintenance of structures to collect and redistribute it. Arguments as to its accumulation and redistribution often create conflicts within the system. Others have rallied with glee on taxing the British monarchy whose vast amount of landholding and wealth needs to be distributed upon to the entire lower sector. Inheritance tax as part of wealth has also gained a varied public sentiment according to Goodin (2004)6. Peace Tax Seven has published that "the UK is on permanent war and tax returns are weapons of mass destruction. Proof of taxpayers' money being spent on useless wars and other unnecessary spending along with political suicide for its implementers are the usual arguments often heard and disclosed popularly. Albeit shallow and defensible other arguments are relegated on the misappropriation of funds and on the theory that the market works so well and that people by definition get what they deserve. Middle-income earners are also weary on the possibility of incremental programs to shift tax burden off the capital and unto consumption by ultimately harming them as the rich echelons turn popular resistance according to Moon (2006)7. The conceptual basis and the implementation of poll tax were severely lacking. Its implementation gave little consideration on enforcement and transition where annual population turnover rates were as high as 36% in the rural areas and 55% in the urban areas. This made it next to impossible to recognize compliance and the ability to pay on the benefit principle. The current tax system is seen as responsible for millions of people paying incorrect amounts of tax and for the Revenue Office experiencing difficulties in collecting taxes due to the payroll deduction system and paying at the wrong rate according to Sutherland. Further, national insurance payments due was unpaid at April 2005. John Locke claimed that because we admix our labour with land, we deserve the right to use and benefit from the products of such land subject of course to the proviso of "at least where there is enough, and as good left in common for others". More commonly we till the soil but generally it does not belong to us, we are merely caretakers for the next settlers and that we have no right of property over it. Payment of our taxes necessitates the proper way of handling the resource for the future generations to enjoy! However if government is decisive on its implementation for the common good, public debates about inequality matters should harness public support to build a fair society where rewards are evenly distributed among all. Equal collection of taxes among the wealthy should be imposed rather than allowing protection and exceptions for government entities and their families which would create a larger outcry. References Politics.co.uk. Goodin, Charles. "UK Wealth Gap Grows".08 Dec., 2004. http://www.politics.co.uk/the-economy/uk-wealth-gap-grows-$7265530.htm 17 April 2006. Frank Sr., Larry R. "Wealth Odyssey. The Essential Road Map for Your Financial Journey: Where is it you are really trying to go with Money" Warner Business Books. Collins, Chuck. "Tax Wealth to Broaden Wealth." The American Prospect vol. 14 no. 5, May 1, 2003. Cook, Heleny. "Business Owners for a Responsible Estate Tax." Oct.,2004. http://www.responsiblewealth.org/ 17 April 2006. Moon, Simon. "Wealth tax rages on". 11 April 2006. http://www.thisismoney.co.uk/tax-advice/inheritance-tax/article.htmlin_article_id=408226&in_page_id=78 17 April, 2006. Kay, John A., and Mervyn A. King. 1990. "The British Tax System". Oxford: Oxford University Press, 1990. Emes, Joel and Clemens, Jason. 2001. "Flat Tax: Principles and Issues", 2001 Fraser Institute: Critical Issues Bulletin. Sanford, Cedric, et al. 1990. "Administrative and Compliance Costs of Taxation". Bath: Fiscal Publications. Sutherland, Holly. 1991. "Constructing a Tax-Benefit Model: What Advice Can One Give". Review of Income and Wealth,37, 2, 199-219. Kershwill, Leonie. "Students urged to take advantage of income tax relief".Aug. 2, 2006. http://www.edwardsandkeeping.co.uk/cgi- bin/item.cgiid=16422&d=101&h=126&f=127 August 25,2006. Read More